Trust Modifications – Changing With the Times
We have heard it said that change is inevitable. It is the only constant in life and one change often requires another change. These change factors play into a family’s financial legacy the same as they play into other aspects of life. Families’ financial legacies are often charted and carried out through one or more trusts. Trusts, by their very nature, are designed to move into the future – to protect, grow and ultimately benefit known, and sometimes unknown, heirs. Because we cannot predict all the future holds, change is often necessary to course correct as future events unfold. As with anything that lasts, trusts may also require change.
Revocable Trusts can be changed or modified with less effort or concern because they are designed to be amended, changed or even revoked altogether as their name implies. However, modifying Irrevocable Trusts can be more difficult. There are a variety of methods to modify an Irrevocable Trust, but there are also limitations and considerations for both the family and the fiduciaries responsible for the management of the trusts.
Often, desired changes in a trust are prompted by other changes. Some of those changes occur outside of the family, such as tax and trust law changes. Other changes occur within the family. The beneficiaries’ circumstances change as they grow and mature. Their need for financial support may be less than or greater than originally contemplated due to professions, other sources of income, serious unforeseen events or special needs. Some trusts are designed to last a very long time and benefit future generations as well as current generations (also known as Dynasty or Legacy Trusts). Over time the number of beneficiaries increases, and therefore, so do the variety of circumstances. Sometimes the family has other financial resources and no distributions have been needed from the trust, resulting in more value than originally intended and the family looking for ways to incorporate philanthropic goals into the trust.
What are some of the most common changes? Often changes are made to the governance or administration of the trust. This may include changing or adding fiduciary roles (perhaps adding an Investment Advisor or Distribution Advisor), changing who can remove or replace the Trustee or Advisors and/or changing who can receive information about the trust. Sometimes the changes revolve around the dispositive provisions of the trust. One common example is delaying the timing of required distributions to the beneficiary. It may be advantageous from an asset protection perspective to maintain the funds in trust if the beneficiary does not need those assets currently. Long-term trusts designed to benefit multiple generations may have a growing number of beneficiaries with disparate needs and investment goals. If these trusts were not originally designed to divide along family lines generationally, they can create an administrative burden for the fiduciaries and, in some cases, contention among family members. Under some circumstances, trusts may be modified to divide and thus maintain family harmony and provide equalization amongst the group of beneficiaries.
There are several methods to modify trusts. Some, such as a merger or decanting, can involve creating new trusts and then combining or moving trust assets. Other methods, such as modification (judicial or non-judicial) or settlement agreements, involve modifying the trust’s provisions. Trust terms can also be changed through the exercise of Powers of Appointment given to beneficiaries or other special power holders.
The method of modification utilized, the provisions of the original trust as well as the actual changes being made, will impact who must act to modify the trust. In certain cases, the original trust document gives a beneficiary or special power holder (such as a Trust Protector) the ability to exercise a power of appointment or other power to change the terms of the trust. Other types of modifications, such as a decanting or merger, are typically done by the Trustee (sometimes at the direction of a Distribution Advisor). Some modifications are an agreement which require either the consent or notice of all interested parties (fiduciaries, beneficiaries and grantors). A judicial modification requires court involvement.
Trusts can be modified under nearly any state jurisdiction. However, state trust laws differ with regard to how a trust may be modified and what provisions may be modified. Certain states have more flexible trust law than others, therefore selecting the most appropriate jurisdiction under which to modify a trust is important.
Consistent with other changes in life, modifying a trust is not without considerations. It is important to discuss with counsel whether the modifications could have any adverse income, gift or estate tax consequences as well as fiduciary risk. If your family’s trusts are no longer aligned with your circumstances, please reach out to your Oxford team of advisors who, in collaboration with legal and tax counsel, can help you evaluate your options to identify optimal solutions for your family needs.